The Pivot To Asia And The Inevitable Failure Of The Trans-Pacific Partnershps

The following article substantively follows the text of remarks by Dr. Elliot J. Feldman during a May 2, 2014 Webinar sponsored by the Knowledge Congress Live Webinar Series and BakerHostetler.

The Origins And Direction Of A Trans-Pacific Partnership (“TPP”)

TPP negotiators have been through more than twenty negotiating rounds since 2010, meeting in ten different countries. We could spend a lot of time on the details. Businesses have lobbied their particular interests, trying to assure that the contents of a deal will be to their liking. However, businesses need a larger picture. They need to have some idea when the changes that a major trade deal would make might come to pass. They need to know whether, when, and where they should be investing, based on the applicable trade rules, particularly rules that impact all businesses – environmental and labor standards, intellectual property rules, investor protections. In my view, TPP is not likely to come to pass at all, at least not during the Obama Administration. I want to explain why, suggesting that sound business planning will not count on change from TPP, at least for several years to come.

Free trade agreements typically are more strategic than economic, as political as legal. The Free Trade Agreement with Canada was the product of a Canadian Royal Commission concluding that Canada’s economic future – and consequently its political independence — depended upon secure access to the U.S. market. Mexico sought NAFTA when it was transforming its politics into a multiparty system. The TPP is the institutional centerpiece of the Obama Administration’s strategic pivot to Asia. As much as the international trade details are important, the very possibility of agreement, and the agreement’s architecture, are strategic and political. As President Obama’s former National Security Adviser, Tom Donilon, has explained, “The centerpiece of the economic rebalancing is the Trans-Pacific Partnership (TPP), the most important trade deal under negotiation today. The TPP’s most important aims, however, are strategic. A deal would solidify U.S. leadership in Asia.”

The United States was motivated to join the TPP talks primarily by two factors. The United States feared that withdrawal from Iraq and Afghanistan could be misinterpreted as a more general withdrawal of the United States from international engagement, especially in Asia. The Obama Administration does not mind signaling that the United States is no longer interested in fighting wars that cannot necessarily produce desired outcomes, but it does mind the implication that American power and influence are diminished. Second, smaller Asian partners asked the United States to join the talks, apparently fearful of being dominated by China’s economy and potentially related power. The United States, still formulating policies toward China, responded to those smaller partners.

The TPP began as the Trans Pacific Strategic Economic Partnership of Brunei, Chile, New Zealand, and Singapore, in 2005. It was always conceived as an organic entity that could add members. In 2008, Australia, Vietnam and Peru all joined in negotiations, followed by Malaysia in 2010. Meanwhile, the United States agreed in 2008 to join talks, and participated in a first round in 2009. The United States then converted an agreement to manage trade and promote regional growth into a proposed model for world trade in the twenty-first century. North America effectively became a driving force for a very different organization in 2012 with Canada and Mexico joining the talks and the United States imagining the TPP as a successor agreement to NAFTA. However, the United States recognized that the number of countries would not be as important as their economic heft. The three most important Asian economies were not among the signatories, nor were they in the negotiations.

The United States encouraged Japan to join, and quickly saw that trade concessions from Japan alone might justify the initiative as a trade agreement. Whereas the United States already had free trade agreements with Peru, Chile, Canada, Mexico, Australia and Singapore, it had no such agreement with Japan. And, the addition of Japan to the talks worried South Korea about being left out – possibly losing some of the advantages it had just won in its own free trade agreement with the United States. Hence, once the United States moved into play in 2009, the modest organization of Brunei, Chile, Singapore and New Zealand grew quickly into a potential agreement among 12, even 13 countries, including all of the important economic powers in Asia – except, deliberately and conspicuously, China.

China interpreted these developments as a containment policy driven by the United States, and although the United States initially was merely answering the call of friendly Asian states to expand trade, it could not persuasively deny what was happening. On the one hand, the pivot to Asia was to engage China. President Obama had said the U.S.-China relationship was the most important of the twenty-first century. On the other hand, the United States was denying China participation in the negotiations on the grounds that the TPP was to be a model, very high standard and sophisticated international trade agreement for which China’s non-market economy was not ready. The United States had transformed the original TPP – a modest trade agreement whose ambition was defined mostly by the number of members it could enlist – into a model that would define free trade according to American criteria, and would confirm, as Tom Donilon wrote in April, U.S. leadership in Asia.

Eventually, the United States said China would be welcome, but it could not now qualify for such high standards. However, Vietnam, a lesser developed country and also a non-market economy, somehow did qualify to participate in the talks and become a TPP member. There was no logical answer to this paradox except to recognize that the pivot to Asia, which had begun as an engagement of China in a constructive relationship, had devolved quickly into a containment in which the distinctions about non-market and lesser developed countries and economies were without a difference. The fulcrum was no longer the smaller founding partners, nor even the weight of North America: the TPP over the last twelve months became enmeshed in the politics of Asia and the role the United States will play in the tense triangle defined by Japan – in the negotiations but far from agreement – South Korea – pondering participation and worried about exclusion – and China – deliberately and systematically excluded.

Trade v. Security

American participation in the TPP talks began with Susan Schwab, USTR under George W. Bush. It had nothing to do with a pivot to Asia. However, there was a convergence of numerous forces that made TPP emerge as a foreign policy centerpiece for the Obama Administration. At the same time that the President was pursuing more engagement with China, elements in China seemed to be challenging an imagined security status quo in the region. The initial TPP members were feeling insecure about China’s growing economy, but others, especially Japan, were insecure about China’s potential military capabilities. Even though the United States spends more than five times as much on defense as China, some in the United States focused on a rapid and steep rise in Chinese defense expenditures. Others noted China’s sustained interest in absorbing Taiwan. Shinzo Abe’s militaristic nationalism in Japan rattled China and provoked territorial claims and counterclaims that led to an American embrace of its defense alliance with Japan as a response to China. These developments, focusing on the military and national security, threatened to distort the American profile in the region, moving the United States from economic partnership to economic overseer and military guardian in a cold war atmosphere. Achieving balance made the TPP the Obama Administration’s available instrument of choice.

A Coalescence Of Critical Voices

Domestic pressures also put a focus on TPP. The cancellation of the President’s planned trip to Asia in October 2013 because of the government shutdown made a replacement journey all the more important if the pivot to Asia were to be credible. The trade negotiations, however, were not sufficiently advanced for the President to expect any conclusions from such a trip. Moreover, as awareness of the negotiations matured in the United States, more and more interest groups emerged, making the TPP more controversial. Constituencies vital to the President, such as trade unions and environmental organizations, lined up against the deal, while interests not known to be favorites of the Obama Administration, such as banks and the U.S. Chamber of Commerce, became his allies. His own political party divided, and no one in its leadership offered unqualified support. Some, like Ranking House Ways and Means Committee Member Sander Levin, have demanded legislation addressing alleged currency manipulation as a condition for supporting Trade Promotion Authority, and constituents such as the Big 3 Automobile manufacturers and American cattlemen have said they will not support a deal without provisions for currency manipulation. Through 20 rounds, currency manipulation has not been on the TPP agenda, nor on the Administration’s. Republicans now can present themselves as free traders favoring the deal, while opposing the President.

A common criticism was (and continues to be) that the TPP has been negotiated secretly. Some texts have been leaked, but none deliberately shared with the public or much of Congress. Senator Ron Wyden, the new Democratic Chairman of the Senate Finance Committee, complained at a hearing on May 1, 2014, “Americans expect to easily find online the information they want on key issues like trade. Yet, too often, there is trade secrecy instead of trade transparency. It’s time to more fully inform Americans about trade negotiations and provide our people more opportunity to express their views on trade policy. Bringing the American people into full and open debates on trade agreements that have the effect of law is not too much to ask.” In an outstanding demonstration of misunderstanding between the White House and Democratic leaders, United States Trade Representative Michael Froman told the Senate Finance Committee at the same hearing, “We have held over 1,250 meetings with Congress about TPP alone.” Such misunderstanding, and such apparent public secrecy, in the absence of Trade Promotion Authority, or fast-track, is a profound problem for the President.

The Need For Trade Promotion Authority

The President of the United States cannot complete a treaty or a trade agreement without Congressional approval. A treaty requires two-thirds of the Senate; an Agreement, a majority of both Houses of Congress. Because Presidents could sign agreements and treaties with foreign partners, only to see them rewritten by Congress, foreign partners could not rely on the President’s signature and were reluctant to negotiate with the United States.

The cure for this handicap has been TPA. It is legislation that authorizes the President to negotiate and enter into trade agreements that subsequently are subjected to an up-or-down congressional vote without amendment. TPA legislation, however, provides guidance as to what Congress expects in trade agreements, and establishes parameters for congressional participation and obligations for the President to keep Congress informed throughout the negotiations. TPA gives trade partners confidence that the President’s signature on an agreement is of value and that the U.S. may accept or reject the agreement, but will not change it. It gives the President authority, and it gives Congress assurance that it knows what is going on.

TPA must precede negotiations and agreements for several reasons. Trade partners will not expose their full hand, or make their best offers, if they’re uncertain whether the President of the United States can deliver on the deal as written. Competing domestic interests must be managed in the making of the deal, not after the fact when their only option is to torpedo the deal altogether.

President Obama proceeded on TPP without TPA. Only in 2013 was a bill for TPA even introduced to Congress for the first time since he became President. The Senate Majority Leader did not support it. To the contrary, he vowed not to let it come to the Senate Floor.

With bravado, the President’s trade team suggested they could negotiate a deal so good that it would be an offer that Congress could not refuse. Of late, however, the trade team has acknowledged that without TPA, they do not expect to gain approval of TPP. Meanwhile, the negotiating partners have indicated that, without TPA, the President has no effective authority to bring negotiations to a conclusion, and they are not willing to cash their domestic political chips on a deal that, because of the United States, cannot be concluded. This is the main reason why so many of the chapters in the negotiations remain open.

The evolving strategy is to place the burden of the whole deal on Japan: if Japan were to open its agricultural and automobile markets, so the Administration seems to think, the deal would be irresistible to Congress regardless what else may be concluded with the other countries – those with whom the United States already has free trade agreements and those (such as Brunei and New Zealand) whose economies are too small to matter. The Administration seems to believe that TPA could be granted just for ratification of the TPP, presented as a matter of national security for American leadership in Asia and as an economic victory by opening valuable Japanese markets.

Conversely, should the Japanese not deliver major trade concessions, failure of the TPP negotiations could be focused there. In a classic quid pro quo, the United States is delivering reassurances to Japan on the military alliance, removing any perceived sting from being blamed for trade failure in the TPP.

This recent shift in ground has embarrassing qualities. The TPP was, according to the Administration, on a course toward completion without Japan, and some believe the TPP can still be concluded without Japan if necessary. That Agreement might have been a U.S. victory, replacing NAFTA, especially with more robust environmental and labor terms; extending American intellectual property rules, thereby especially advancing the interests of the major pharmaceutical companies; and reassuring American investors abroad through enhanced investor-state arbitration. Instead, now, the Administration appears to have placed the burden of success or failure on Japan, presumably to relieve itself of the looming failure of achieving TPA in Congress.

Security Claims The Foreign Policy Spotlight

However much President Obama wanted to talk about trade and the TPP on his April swing through Asia, he had security issues thrust upon him. His response to the Russian invasion of Crimea and fomenting of revolution in Eastern Ukraine was being watched carefully and shadowed everything else. Prime Minister Abe made sure the President would seem to take sides in the Japanese dispute with China over the Senkaku/Diayou Islands, and hoped he would do the same for the Japanese dispute with South Korea over the Dokdo/Takeshima islands. The President spent as much time and energy trying to get Japan and South Korea on the same page as he did advancing the cause of the TPP, particularly because he needs their cooperation – and China’s – on the higher priority of North Korea’s expanding nuclear capability. When gunboats from different countries are sailing near one another with contrary objectives, trade issues seem less important.

Japan does not want to be held accountable for a TPP failure. Deflection of attention to security issues served to further isolate and contain China, ease Prime Minister Abe’s rearmament desires, and secure U.S. support. It did nothing, however, to advance the President’s agenda and did not move TPP forward. Instead, the United States was left to contemplate a TPP without Japan — as had been the expectation until a year ago – without South Korea, which is reluctant these days to join anything with Japan – and without China which, despite the U.S. suggestion last August, continues to be the Agreement’s intent. And all that attention to security is about nothing more than small piles of uninhabited rocks.

The fate of TPP as a matter of foreign policy is caught between a grand scheme to knit together 40 percent of the world’s economy, on the one hand, and the triangle of disagreement over sovereignty and security involving the three most important economies in Asia, on the other. It raises the existential question whether a trade pact designed to contain or isolate China is good for the future of world trade. Many think it is because they doubt that China plays by the rules. Many think it is not because China’s economic power is here to stay. The regrettable feature of this dilemma is that it has not been addressed systematically at all. Instead, the Obama Administration has slipped into it, drawn first by four economically and militarily insignificant Pacific countries worried about China, and then pulled more forcibly by a nationalistic Japanese leader looking to rearm and be more assertive globally.

There is reason to think that the Obama Administration is not postured as it would have liked. It wanted to engage China, not contain it. It wanted to develop a regional trade agreement that would attract China, not repel or even expel it. TPP, instead of becoming a source of regional amity, has evolved into a potential source of conflict. The President’s National Security Adviser counsels “constructive relations with China,” but there is little in the pivot to Asia, especially in the cornerstone of the TPP, that is reassuring.

The Status Of Negotiations

TPP negotiations are unlikely to produce an international agreement regardless whether Japan or South Korea are parties. There are too many fundamental disagreements among the twelve countries in the talks, and the American attempt to infuse the region with American values and American legalities is transparent.

Despite the secrecy of negotiations, documents have leaked. Some have included full draft texts, as for an environmental chapter. Mostly, they have exposed the lack of international progress. Following the November 2013 Round of Negotiations in Salt Lake City, the internal commentary of one participating government contained, in no particular order of importance, numerous observations.

According to the leaked document, notwithstanding that “the U.S. is exerting great pressure to close as many issues as possible this week,” “The results are mediocre.” The meeting, this commentary reported, ”served to confirm the large differences that continue in most areas of the [IP] chapter.” For medicines, the United States “resubmitted a text that had been strongly rejected in the past.” “The United States, as in previous rounds, has shown no flexibility on its proposal [for investment]... Only the U.S. and Japan support the proposal.” The chapter on State-Owned Enterprises “is very far from closed.” There was “very little progress” on Rules of Origin, and the negotiations over textiles were in “a major crisis.” The “Meeting” on the environment “was interrupted because we could not get past the second issue [on] the definition of environmental law.” There was “inadequate progress” on financial services: “The positions are still paralysed. United States shows zero flexibility.” The United States had been aiming to close the entire deal by the end of 2013 and get it before Congress before the summer election campaign.

Historically, the United States has had its way in international negotiations most when forging bilateral agreements because it has always been the dominant player. Other countries typically want to draw the United States into multilateral negotiations because they can band together to dilute American power and influence. Here, the United States has been drawn into a multilateral negotiation that it has tried to treat as a collection of bilaterals (an opportunity to dismantle Canada’s supply management; Japan’s agricultural protectionism; Vietnam’s textile preferences; and so forth). Yet, even were the United States somehow successful internationally in the negotiations, Congress — probably for the wrong reasons – would not close the deal.

The United States’ strategy for negotiation and ratification has been complicated and backwards. The process, as it has evolved, has been to place the initial burden on Japan and to present Congress with a deal it could not refuse. Congress, nonetheless, whatever it is – Republican or Democrat — will refuse it, for at least three reasons. First, a Republican Congress will not give President Obama a signature foreign policy success in trade. Republicans consider international trade their domain (the history of trade commitments to the contrary notwithstanding), and the current Republican Party is obstructionist regarding all Obama initiatives. Second, the President’s own Party does not support the Agreement, suspicious about labor, the environment, banks, pharmaceutical companies. And third, most of Congress feels betrayed by the alleged secrecy in making the deal.

Had Obama followed the historical process, in which TPA precedes TPP, he may have been more successful, or he would have known sooner that the objective could not be reached. Now he is presented with the risk of failure where American credibility throughout Asia is at stake. It would have been better to know earlier, or to have lowered expectations. Those options are gone.

Conclusion

The President needs to complete a very attractive TPP in order to persuade Congress to vote it up or down, requiring prior TPA legislation. His international partners, however, are not making their best and final offers without TPA coming first. Prime Minister Abe, for example, does not want to take on his whole agricultural sector in order to make a deal that could fail in the United States Congress. There seem to be almost daily reports that Japan will not give up its protection of five “sacred” agricultural products, a position guaranteed to crater the deal. So, TPP can’t be completed successfully without TPA, and TPA cannot be passed without a completed and attractive TPP.

At first, China seemed to interpret the TPP as a U.S.-led attempt at containment. Over time, China seemed to recognize fatal problems with the negotiations and worried less. At one point, a year ago, China called the U.S. bluff that it might be included in the talks, whether because China was genuinely interested, or because China wanted to expose the real purpose of the TPP.

Today, China’s public discord with the United States is concentrated on the American engagement as an ally of Japan in sovereignty disputes. Trade disputes — principally American complaints about state owned enterprises and Chinese state support for exported merchandise – continue unabated in the friendly confines of government investigating agencies and dispute panels of the WTO, and seem reminiscent of the American confrontations with Japan during the 1980s, in the days of the GATT. Even as trade disagreements sometimes take on the appearance of a trade war, security issues have replaced them in prominence and have induced President Obama to insist again on the American acceptance of China’s rise as a major power.

One last word for our European friends, who have been as seduced by TTIP as our Asian friends have been drawn into one protracted negotiation round after another for TPP. The Administration has made TPA dependent on TPP instead of the other way around. Consequently, it perceives TPA as a one-off on behalf of TPP. Even were it possible to imagine that this strategy could succeed once, it could not succeed twice. Therefore, at least for the life of this presidency, TTIP is even deader than TPP.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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